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ECONOMYNEXT - The government is expected to further tighten vehicle imports after sharply raising customs duty on small hybrid cars that fuelled a widening trade deficit and mounted pressure on the exchange rate, officials said.

Finance Minister Mangala Samaraweera announced the higher taxes on the smallest car segment of cars which has seen a huge jump after his “green, clean” policy of encouraging hybrid and electric vehicles in his budget for 2018.

Central Bank of Sri Lanka officials said there was a foreign exchange outflow of 195 million dollars to import cars below 1,000 cc engine capacity in the first five months of this year, dramatically up from 26 million dollars spent in the corresponding period last year.

The mid-sized cars below 1,500 cc also saw a rapid increase going from 20 million dollars in 2017 to 73 million dollars this year, indicating that this would be the next segment targeted to plug forex outflows.

Gasoline powered Sports Utility Vehicles (SUV) also saw a surge this year. Imports of the high-end SUVs cost 8.8 million this year, compared to just 2.6 million spent last year.

Central Bank Governor Indrajit Coomaraswamy defended the government’s decision to raise taxes on the top selling Suzuki Wagon R and similar models saying the entire country would have suffered if the foreign exchange drain was not checked.

“In the short run, the deterioration trade balance had to be addressed… When the balance of payments get worse, there is pressure on the exchange rate and the poorer segments of society suffer,” Coomaraswamy said.

He argued that a deterioration of the exchange rate as a result of more money going out of the country to import vehicles would have impacted cost of living for all and caused more wide-spread harm to the economy.

Finance Ministry sources said the authorities were also considering several other measures to plug some of the loopholes in the current vehicle taxation system.

Vehicles are taxed based on the engine capacity and the type of fuel used irrespective of the actual value of the vehicle. This means a cheap Indian SUV with a 2,500 cc engine is taxed at the same level as an European model with the same engine capacity although it costs three times more to import.

The authorities were considering a tax based on engine BHP – brake horse power - and other factors to ensure a more equitable duty structure.

With the current system favouring cars with an engine capacity of less than one litre, importers have begun bringing in high-value turbo-charged 1,000cc cars at a lower duty.

Political backlash

The government faced intense criticism over its sharp increase in duty for small cars after coming to power on a promise to make them more affordable for the middle classes.

The new government did sharply slash vehicle customs duties soon after coming to power and the result was that car registrations in 2015 hit an all-time record of 105,628 unit, or much more than the number of cars registered in the three previous years from 2012 to 2014.

In 2012 the number of cars registered was 31,546 and it dropped to 28,380 in 2013 to pick up somewhat to 38,780 in 2014, the final year of the Rajapaksa administration. Car registrations in the first four months of this year hit a record 20,990 and was well on the way to another all-time annual record when the brakes were applied by the Finance ministry.

The ministry is facing criticism for using a sledge hammer when it could have used other administrative measures such as limiting credit for car imports to deal with the huge outflow of foreign exchange.

Official figures showed that 59.9 percent of all car imports were financed through lending institutions this year. This shows a credit squeeze could have also reduced car imports without resorting to the politically unpopular tax increase, industry officials pointed out.

They also noted that if the government was serious about halting car imports it could have imposed a temporary moratorium on duty concession car permits until the country weathered the foreign exchange difficulties. Most of the bigger cars and SUVs are brought in using duty concession permits which are openly sold by way of advertisements in weekend newspapers and websites.

Car importers said they appreciated the government’s move to curtail imports, but asked the authorities to enter into a dialogue to ensure stability of policy.

“We understand the government’s policy decision taken on the August 1, 2018 to increase excise duties targeting the small motor cars segment.

“While the raising of excise duties is likely to stem the growth for small cars, we believe that this needs to be coupled with medium to long term policies that would result in the sustainable growth of the motor industry,” the Ceylon Motor Traders Association said in a statement. (COLOMBO, Aug 4, 2018)